ArmInfo. Export Insurance Agency of Armenia - one of the most important institutions in the insurance market – launched activity about 6 months ago. It was established to help develop the export potential of Armenia amid newly announced industrial policy. The Agency proved the efficiency of that decision already during the first few months of its activity. At the request of ArmInfo, Vazgen Abgaryan, Executive Officer at the Export Insurance Agency of Armenia, tells about the key directions of the new state agency’s activity, its principles and tasks.
Insurance of export transactions is an absolutely new sector, which has considerably replenished the list of financial tools that actually expand the sales markets for local producers. When the Agency entered the market with such an offer, what did you feel – unsatisfied demand or the need to form that demand with your own efforts? In other words, how prepared was the market for the new service?
Certainly, there was certain demand for insurance of export transactions, but the demand was inconspicuous. The thing is that exporters that have never seen such services need some time to realize the importance and seriousness of our product, its efficiency and usefulness for fulfillment of their own export capacities. When exporters work by the open account payment system, they face a big number of risks. It is very often impossible to assess these risks independently and our key mission is to minimize these risks to the extent possible.
What sort of risks are you speaking about?
I am speaking about the non-payment risks. There can be various reasons here, ranging from insolvency of the foreign contracting party to reluctance to pay for the good supplied on various excuses or without excuses.
The first risk can be the economic inconsistency or temporary insolvency of the foreign contracting party. When we offer the exporters to insure the export transactions, they very often say, “We know our partners, we work with them and we trust them”. But any relationship, any business operation is fraught with risks. In this case, I am speaking about the processes we observed in Russia last year. The 70% ruble depreciation resulted in immense difficulties for Russian importers and part of them became simply insolvent. These unexpected changes in the market situation do not depend on the contracting parties, no matter they are old and conscientious partners or not. Force-majeure factors such as political decisions related to military operations, conflicts, embargo, natural disasters or limited trade operations, impossibility to convert the currency, etc. are nothing but serious risks and we insure them.
The second type of risks related to the contracting party’s dishonesty. Ourjobistorevealsuchunfavorablefactors. This especially concerns new factors, though it is not ruled out that the contracting party may show dishonesty not at once, but after the confidence in the contracting party grows and the transactions become tangible. Besides the dishonesty, there is also a factor of financial inability, which mostly becomes the reason of non-payments or considerable delay in payment on various excuses. By getting inexpensive insurance at our agency - 0.3%-0.6% of the export transaction amount – exporters obtain a partner, which is capable of assessing the real solvency of the contracting party and compensating for up to 95% of the loss if a problem arises.
How long do you think the market needs to realize the need for partnership with the Agency?
The practice of the CIS countries and similar (developing) markets of the world shows that at least three years are needed for creation and institutional development of companies engaged in insurance of export loan risks. Nevertheless, I should say that the past half a year was quite efficient for us – during which we provided information on our services to over 300 exporters in Yerevan and in all the provinces of Armenia. We have established business contacts with the commercial banks, which provide export factoring upon our security. We have published on our website the list of a thousand potential buyers from the CIS and Europe in specific areas and each exporter can make use of this list to see the buyers and the products, to establish business ties and to apply for our insurance, because it is a new contracting party and absolutely new business relations. When summing up the outgoing year, I can say that over the past 7-8 months we have managed to approve and sign over 20 agreements upon the exporters' applications. All of them were financed at preferential interest rates by the commercial banks of Armenia without any additional collateral. The total amount of the approved limits has exceeded 2 million USD.
What do you mean by saying «without any additional collateral»? Don't the commercial banks demand collateral when providing export loans?
This was security in the form of a shareholder's guarantee and that guarantee applied only to the cases when we can deny loss indemnity for some reasons. The only condition for loss indemnity denial is the unconscientious behavior of the exporter, i.e. either the export delivers goods, which fail to meet the export contract requirements, or the exporter roughly violates the insurance contract requirements. These are the exceptions that can be controlled in the process of operating activities of the export transaction.
I think the banks are interested in such operations, because your insurance makes it possible to reduce the loss reserve, which has significantly grown recently. Inthislight, thelendingisalsoslackening.
The experience of some countries (the EU, the U.S., Canada, Russia, Belarus, etc.) shows that when providing loans secured by the insurance policies of the state export insurance companies, the banks have an opportunity to weigh up the capital adequacy by more preferential risk indicators (even up to 0%). Unfortunately, such a product needs time for institutional accomplishment. In our country the weighing is done within the general legal framework, i.e. we have no advantages yet, but we are actively working with the relevant departments to settle that problem. I think this issue will be addressed in the course of time, but our experience shows that this issue is more relevant for the mid-term and long-term capital-intensive transactions, where the real burden is on a bank's capital. Here the banks are capitalized well enough and the export factoring transactions last for about 3-4 months, no longer. This may be an additional impetus, but a more important thing now is that unlike other security, our insurance policy is completely liquid, i.e. a bank gets a real opportunity to control its own risks without any problems, especially as we provide the indemnity in the export contract currency at the Central Bank's exchange rate in terms of Armenian drams. So, the bank has no additional uncovered positions.
Doesn't the shortage of factoring companies in Armenia create an institutional loophole on the market?
Certainly, the presence of factoring companies operating under the one-factor model in Armenia would enhance the activity and efficiency of the foreign trade finance in the country, but our product has been created to enable the banks to switch from the two-factor model to a one-factor one. We have quite a serious arsenal of tools and we can comprehensively evaluate the foreign contracting parties. In addition, we are members of the Berne Union, which includes more than a hundred large players on the global market – both national export credit agencies and large commercial players – and we can apply to them under the cooperation memorandums, should an opportunity arise. Many of them are willing to share with us their experience, information and collection services.
I think the creation of a structure like yours is not only of much importance to the economy in terms of export development and reduction of export-related risks, but it is also important as an institution, which raises the image of Armenia as a foreign trade partner.
The exchange of experience and information is very important and it is the key component of the Berne Union. Today we are a member of the Berne Union Prague Club. The Club operates for developing markets with smaller criteria and it is meant for the newly created export credit agencies and for the agencies that fail to meet the high requirements in terms of the loan book. In addition, we have bilateral agreements with similar structures in Belarus, Czech Republic, China, Iran; we are also going to sign a comprehensive agreement with Russia. These agreements do not limit our cooperation. There were cases when under these agreements we gave some non-confidential information about our Armenian companies and it gave the foreign partners an additional impetus for real cooperation with our business.
Such cooperation, for instance, can imply soft-term financing for purchase and import of technologies, manufacturing lines and machinery by foreign banks, say, at Libor+4-5% for up to 7-8 years. This is the real component that comes out of the cooperation with foreign export credit agencies. Armenia already has such projects involving our foreign partners. The Chinese colleagues visited Armenia a month ago, we organized their meetings with the commercial banks and they promised to finance transactions upon their security at 5.5-6% per annum for 7-8 years. Beneficial cooperation is when business gets inexpensive loans and the sales market for the future products is determined by the contract.
What can you say of statistics for the half a year of your activities? Which market segment has applied to you most often? What sectors experience the most export growth and what sector contains the biggest number of risks?
Our key segment is the non-resource market. The main direction is the processed agriculture. A big demand is registered for export of alcohol, textile industry, pharmacology, etc. Special attention should be paid to China as a huge sales market.
Before we entered the market, the Armenian exporters had three options of work with the contracting parties – advance payment, involvement in a deal of some banking tools (L/Cs, guarantees, etc.), with these two options failing to satisfy the buyers in most cases due to additional expenses or drop in import competitiveness. The third approach is a transaction with an open account. The latter gives no confidence that the payment for the goods delivered will be paid within the loan period, i.e. the deferred payment period provided to the buyer by the seller. In our case the most important thing is to find a buyer meeting our input parameters. In that case you can rest assured that we will insure up to 95% of the export contract amount in the currency indicated in the contract, even if it is the Chinese Yuan. If the exporter cannot wait for three months and suffers problems with the floating capital, the commercial bank can provide export factoring upon our security (of course, if the exporter meets the minimum requirements to the borrowers by the banks). That is to say, we are already entering the phase when even amid the shortage of floating funds, it is possible to organize export operations with any partner in any corner of the world without any risks.
So, in response to your question, I would say that our exporters can confidently ensure export diversification in terms of not only commodity line but also geography of supplies, which is also important, because they do not depend on the economic situation of a specific country in terms of risks. There are all prerequisites for that.
What are the terms of risk assessment?
The key advantage of export insurance as compared to the banking product is that the banking product mostly demands involvement of two parties. In our case, the buyer's involvement is not compulsory. The buyer does not even know us. The exporter gives us the details of its contracting party and we gain information about it through the database. Based on the information about the buyer, we calculate the financial and operating indicators of the business and assess the solvency of the buyer and the probability of the debt repayment within the relevant period. If the results meet the minimum requirements, a positive decision on insurance is taken. Naturally, if there is no financial statement or if the business was launched half a year ago, we insure no transactions with such a contracting party. This should seriously prompt the exporter that the possibility of non-payment is high.
Is a 05-06% fee enough for such activities?
It is not enough for the first few years of activities. But this market, like any insurance market, operates by the rules of big figures. Unfortunately, we have no big figures yet, but the lack of big amounts explains why we are a state structure, not a private one. Our structure has been set up to support and stimulate export rather than obtain profit. We are covering our expenses with the investment income and we hope to get operating profit in 3-4 years. Our 05-06% tariffs are not a burden to the exporters. On the global market the tariffs are lower. For instance, on the European market of such services the tariffs make up 02-03%, but the turnout is huge – it amounts to billions of euros.
You check consumers, assess the risks of exporters. Do you check exporters? Let’s imagine that there is a contract and you have provided insurance after checking the foreign importer, but the exporter, for instance, supplied unconditioned goods. After the so-called examinations and procedures, the consumer refuses to pay. Whatshouldyoudointhatcase?
We do not examine exporters, but it does not mean that we pay indemnities in any case. Our insurance rules require an exporter to fulfill its commitments and responsibilities under the export contract at full. If the contract provides for supply of a particular type of wine, the exporter must supply that very type of product. If the exporter and importer enter a dispute which is eventually settled in favor of the importer through independent examination and we do not see that any specific actions are taken against our client – exporter (which is not ruled out), we do not pay indemnity or pay it partially. If it is proved that the importer is not right, we pay loss indemnity by up to 95%. Therefore it is very important to fill in all the details and specifications of the supplied product and the detailed process of settling disputes. The supply contract must be drafted properly too.
Another case when we ca deny loss indemnity is when an exporter provides knowingly fraudulent information on the contact or transaction, for instance, if the importer and exporter is the same person or they are affiliated and we can prove that affiliation. In other cases, we recompense for the losses. This scheme works everywhere in the world. There is no other export insurance company in the world to operate on other principles. If an exporter is bonafide and implements all the conditions of the contract, he has no reason to worry for his debt – it is insured.
Anyway, what makes you product better than a performance bond?
First, a buyer does not know about our insurance. Second, a performance bond can be tried in the court at any reason. Meantime, in case of a problem we try to settle the problem – we have a deferred period (2-3 months) – during which we actively work with both exporter and importer to find out the reason of the non-payment, we look into the deal and try to settle the problem peacefully and pay the indemnity at the end of the deferred period.
What is your market forecast for next year?
Armenia had a very rich harvest this year. It was a good season to produce alcohol and processed agricultural products. These reserves should be sold next year and we expected a growing demand for our services by producers of alcohol drinks. It will be mainly export to the CIS, I think, though China also shows a high interest in alcohol products. There is enough demand by Europe, mainly Eastern Europe and Baltics. United States show certain demand for our products – processed fruits and vegetables, juices, tined products etc.
When speaking of cooperation with China, we touched upon the pre-export financing. Could you tell a little more about that service?
It is a separate and very interesting topic and, I think, in future we will be addressing it more frequently. One can see certain demand in the market of pre-export financing when there is an export contract but the exporter lacks enough money to buy raw-materials and make other expenses to make the product marketable and export it. We are now communicating with exporters, analyzing the market, negotiating with re-insurers and our goal is to introduce pre-export financing in the insurance market next year. Commercial banks will be able to provide short-term loans to our exporters for financing of production of export-oriented goods. What will make this service different from the current bank products is that a borrower will not be demanded collateral till a certain period and loans will be provided under lowered interests, as the risks for banks will be lower too.
Actually, you are expanding your activity up to insurance of export productions…
Eventually, but there is an important aspect: to get financing, an exporter needs a signed contract acceptable to us. That is, insurance must be connected with export insurance by 100%. We will not provide insurance for pre-export financing unless there is a contact for export insurance. We must be sure that this money is used for financing of export.
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